North Lanarkshire Council v Crossan Judgement of Temporary Sheriff Principal Kearney on appeal, 2 May 2008. At Airdrie
Posted: Thursday 9 October 2008
Appeal decision
This was an appeal by the common debtor, Shirley Crossan, in relation to an action of forthcoming. The debtor challenged the arrestment as being incompetent by virtue of attaching funds in a bank account which were state benefits. The Sheriff in the initial case [2007 SLT (Sh Ct) 169] decided that while the benefits could not be attached in the hands of the payer, for example the Department of Work and Pensions, once the benefits were paid into a bank account they ceased to be protected in terms of the relevant legislation and were then arrestable in the bank’s hands.
On appeal at Airdrie Sheriff Court the temporary Sheriff Principal upheld the debtor’s argument that benefits which are paid into a bank account are immune from attachment by an arrestment provided the funds remain identifiable as benefits.
Bank practice re attachment of funds
We do not consider that the practice of banks in relation to arrestments will require to change. Once an arrestment is lodged in a bank's hands the bank is under a duty to obey the court order (the arrestment) and attach funds if available. It is not for the bank to assess whether the funds remain identifiable as benefits and should not have been attached. If the common debtor considers that to be the case, it is for the common debtor to persuade the pursuers to issue a letter of withdrawal or, if they are not prepared to do so, to petition the court and obtain a court order which
directs the bank to release the attached funds. (Note that the Govan Law Centre website has a style letter for such circumstances – see http://www.govanlc.com/benefits_&_bankarrestment.htm).
The prudent course of action for banks is to continue to attach the funds when an arrestment is lodged in their hands. It is for the common debtor to persuade the pursuers that although there are funds in the account, the funds consist of benefits and should be released.
If the banks release funds to the common debtor without the pursuer’s knowledge or consent, the pursuer could ask the banks to prove that the funds were identifiable as benefits. This would involve releasing details of the balance of the account and the make up of that balance and would require the common debtor's consent.
What about the bank’s own right of set-off?
In relation to set-off, we consider that there are two slightly different scenarios:
Firstly, where the debtor only has the one bank account to which the benefits are paid but where he has "overdrawn". In those circumstances, where a credit representing a benefits payment is received for the credit of the overdrawn account it will immediately reduce/repay the amount overdrawn. That reflects the debtor-creditor relationship between
banker and customer. This is not “set-off”, but simply a case of a bank debt being repaid, the bank having provided an advance to the customer in anticipation of the payment of the benefits still to come.
The second scenario would be where the common debtor has two bank accounts, one which is in credit to which the benefits are paid and which consists only of benefit payments (or where the funds remain identifiable as benefits), and the other which is in debit. For the purposes of this advice we have assumed that both accounts are in the same name and the same right, and the other pre-conditions for set-off have been met. Note that the bank’s right of set-off arises where the bank had served a demand and any conditions have not been met. It may therefore be a small number of cases where any challenge would arise.
In terms of the Crossan judgement there is a reference to Section 187(1) of the Social Security Administration Act 1992 which sets out that:
“every assignment of or charge on [the various benefits] and every agreement to assign or charge such benefits shall
be void”.
The key question therefore is whether a bank’s right of set-off against a credit balance which consists only of benefits (or where the funds remain identifiable as benefits), could be challengeable on the basis that the operation of the right of set-off is a “charge” against the benefits. The answer is not entirely clear, and there is certainly an argument that the netting off of the credit and debit balances may be by operation of law rather than by operation of an assignment or “charge”. The original Sheriff in the Crossan case made the point that the omission of the words “shall not pass to any other person by operation of law” from the relevant sections relating to payment of benefits under the Social Security Administration Act 1992 (set out above) and the Tax Credits Act 2002 (which are essentially in identical terms) was “not insignificant”, though the Sheriff Principal made the point that the Sheriff had not expanded on the
particular significance of the omission.
It may well be that in practice such set-off cases will be few and far between – though there may well be more of them following the Crossan appeal decision.
It appears that there are three options open to banks:
- continue to operate the right of set-off on the current basis. If challenged by a customer, the bank could on a case by case basis assess whether they are willing to release the benefits where the funds are clearly
identifiable. Such decisions would be dependent on the amount involved, the management and administration time and, of course, the cost in dealing with any complaints/correspondence received from the customer, their Solicitors or advice agencies or defending any court action that was raised by the customer. This would be a commercial decision and thus would not create any judicial precedent; or - decide to change the current practice to the effect that the bank will no longer operate a right of set-off against credit funds in an account where those funds remain identifiable as benefits. This may result in losses to the bank in the event that the debt due to the bank cannot be recovered from any other source; or
- on the first occasion the bank receives a challenge against their exercise of the right of set-off it resists the claim and awaits a court action to determine this issue. This is an inherently risky strategy as the court may
decide in favour of the customer and thereby provide a judicial precedent which may be binding on all banks.
On balance we would recommend that banks follows option 1, subject to any commercial decision on costs, time and the like. This would be a cautious approach but would leave the bank in a position to determine on each occasion where a challenge was made by the customer how they intend to resolve the issue. It would also leave the bank to determine any de minimis levels or policy requirements.
Contact Details:
Name: John Lunn
DDI: 0131 247 1066
Email: john.lunn@morton-fraser.com
The contents of this note are for information only and are not intended to be construed as legal advice and should not be treated as a substitute for
specific advice. Morton Fraser accepts no responsibility for the content of any third party website to which this article refers.
